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US hedge funds are expected to reduce the total amount they spend on IT by around 40%, or $570m (€444m), next year, as the "unfavourable" economic climate sinks some funds.

Total IT spending is likely to fall to $882m in 2009 compared with $1.45bn for the last 12 months, according to US consultancy Tabb Group.

"Hedge funds' close relationships with struggling banks, roiled markets and nervous investors puts them in a precarious position," Tabb analyst Cheyenne Morgan wrote in the report. "The tremendous pressure facing the industry will inevitably result in fewer hedge funds and a lower total assets under management."

However, the report said that surviving hedge funds will continue to upgrade their trading technology to better compete with rivals, because the majority still rely on traditional investment techniques and have yet to embrace cutting-edge systems.

"While hedge funds' investment in technology will be curbed because of reduced revenues, the front office will not suffer as much as other areas of the firm," Morgan wrote. "In order to remain competitive, hedge funds will need to make significant investments in upgrading their trading infrastructure."

Tabb conducted a survey of 61 US hedge funds with a combined $227bn worth of assets under management, and found that more than three-quarters wanted to extend automation of trading to asset classes other than equities, including listed derivatives, fixed income and foreign exchange.

The report said funds will also need to invest in back-office technology to improve efficiency and reduce risk in the face of a more complex trading environment.

"The use of algorithms and smart-order routers will continue to grow and advance, but in today's environment there will be as much focus on mitigating risk as there is on maximising returns," Morgan wrote.

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"Traders need technology that allows them to factor more complex circumstances - such as rumours, new regulations, or even the firm's daily changing asset levels - into analytics, risk management and trading strategies."